Budget 2016: Changes to income and capital gains tax for entrepreneurs

Has the Government of Ireland missed a vital opportunity in Budget 2016 for incentivising entrepreneurs?

Much needed changes to Ireland’s capital gains tax aimed at incentivising entrepreneurs were announced by Finance Minister Michael Noonan TD in the Budget 2016. But there were no major changes on the BES/EIIS issue, which is deemed uncompetitive by entrepreneurs when compared to the UK.

In a speech laden with all sorts of pre-election goodies and rhetoric around keeping the economic recovery going, Minister Noonan revealed a number of measures aimed at encouraging entrepreneurs and supporting small business owners.

Income tax

Noonan said that SMEs account for 68pc of all employment, some 730,000 jobs.

“All of these SMEs are being run by entrepreneurs. We need to encourage new entrepreneurs and support existing entrepreneurs,” Noonan said.

Noonan said that after consulting with SMEs he is addressing an anomaly whereby an employee often takes home a greater proportion of their salary than an employer or entrepreneur on the same gross income.

To address this disparity he announced an Earned Income Tax Credit to the value of €550.

“It will be available to those with earned income who do not have access to the PAYE credit. This will be a significant benefit to small business owners right across the country, including small retailers, publicans, farmers and tradesmen. I see this measure as a first step and further steps will be taken in future budgets, as resources permit.”

Capital gains tax

A thorn in the side of entrepreneurs has been the failure of capital gains tax to be brought up to speed to benefit all sectors of the economy. In the general economy, it stands at 30pc, whereas in defunct areas like construction it has been in the past reduced as low as 11pc.

Today, Noonan attempted to address this anomaly.

From 1 January, a reduced capital gains tax rate of 20pc will apply to the sale of all or part of a business with an overall limit of €1m in chargeable gains.

“The relief will represent a simplified and upfront benefit for individuals who propose to sell their business,” Noonan said.

Noonan also revealed a plan to extend the three-year tax relief for certain start-up companies for a further three years until the end of 2018.

“The relief has been identified by entrepreneurs as an important support. The review, which is being published today found that, in 2013, the relief supported 1,038 companies who employ 11,750 people at an estimated cost of €4.9m.”

A missed opportunity

However, Noonan missed out on a vital opportunity to address struggles start-ups have with share options as well as with the so-called Business Expansion Scheme/EIIS, which is also known among entrepreneurs as the“friends and family” round where people can claim tax back on investments in start-ups.

While it increases company limits under EIIS to €5m a year and €15m overall, this is still far less than the UK and is unlikely to inspire investors.

The structure of BES and its rewards have been lacking incentives to such a degree that the total amount invested in Irish start-ups under BES has fallen by 70pc.

Entrepreneurs in Ireland have been calling on the Irish Government to implement something far more competitive like the UK’s SEIS scheme, which has grown participation by 55pc in the same time frame, and is a reason for Irish start-ups to establish offices in the UK in order to reward and incentivise new hard-to-recruit staff members in the war for talent.

Budget 2016 notes shared by Brian Caulfield, chair of the Irish Venture Capital Association (his last line says it all):